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Sino-Forest Probe Fails to Answer Key Questions

By

Duncan Mavin

Updated Feb. 1, 2012 3:14 p.m. ET

The independent committee investigating fraud allegations at Chinese timber company
Sino-Forest Corp.
issued its final report but failed to answer key questions about the company's accounting, including whether it valued its assets correctly.

The troubled Canadian-listed Chinese forestry company, which is under investigation by Canadian securities regulators and police, delivered its report Wednesday, several months after the allegations were made by short-selling firm Muddy Waters LLC.

The special investigative committee—made up of external lawyers and auditors, as well as company officers—that compiled the report, said "there remain outstanding issues that have not been fully answered." Those issues include details on certain related party transactions and the valuation of the company's forestry assets. Both issues were key to the claims made by Muddy Waters last June.

In an interim report in November, the committee said that Sino-Forest owned the trees it claimed to own and confirmed that it accurately accounted for its cash stake. But it wasn't able to place a value on the trees, a crucial issue.

The committee took initial steps to value the trees, saying it hired an external timber consultant to test a sample of forestry stock. The consultant found that the size and cover of the forest was roughly in line with what the company had reported. However, the consultant has yet to complete work that would prove whether the trees are valued correctly, the committee's report said.

The final report is filled with dry technical detail on the forestry business and marks a stark contrast with an upbeat earlier report on the activities of the investigating committee. When that earlier report was released, the company's chief executive,
Judson Martin,
said the committee's work was nearly complete and that it hadn't found fraud at the company.

Since then, Sino-Forest has defaulted on indentures relating to its bonds, and the company's management has publicly fallen out with some of its major shareholders, including New Zealand billionaire
Richard Chandler,
who called for the replacement of Mr. Martin. Last week, a class-action lawsuit was brought against Sino-Forest in the U.S. Supreme Court on behalf of some investors in the company.

Carson Block,
director of research at Muddy Waters, and Mr. Chandler declined to comment.

Tom Atkinson, enforcement director for the Ontario Securities Commission, said the Sino-Forest probe is "a complex case and our investigation continues." A spokesman for the Royal Canadian Mounted Police declined to comment.

Trading in the company's shares on the Toronto Stock Exchange has been suspended since late August.

At the start of 2011, Sino-Forest had a market capitalization of about 5.78 billion Canadian dollars ($5.69 billion). Just before the stock was halted, the market cap had fallen to about C$1.18 billion.

The company's future is uncertain, and it appears unlikely that its shares can trade again in its current form. Mr. Martin has said that management is considering various options. However, the company hasn't engaged bankers to look into a possible sale, said a person familiar with the matter.

Last month, a group of bondholders agreed to waive until April 30 the default arising from Sino-Forest's failure to release 2011 third-quarter results. Sino-Forest also agreed to keep the bondholders informed of any "sale process, capital or equity process."